Business partnerships may have a taxing time in the few days between now and the end of the tax year if they are to change their policies to avoid taxation under the new pre-owned assets tax rule that comes into force on April 6^th.

The new rules were introduced to combat inheritance tax avoidance and work by making an income tax charge on property or other assets given away but still benefited from, say by still living in a house that has been 'pre-given' to heirs.

But it seems the tax rule will also affect business partners who have set up a life assurance policy subject to a 'business trust' of which the partner is a potential beneficiary. Such arrangements are commonplace to avoid the business being wound up in the event of an untimely death of one of the partners and not at all to do with avoiding IHT.

It appears the Inland Revenue has known about the problem for some time and does not intend to change the rules. The Telegraph quoted Colin Jelley, of Skandia and the Association of British Insurers tax panel, as saying: "We have been consulting with the Inland Revenue for more than a year and are disappointed the guidance says business trusts will be affected."

"Tens of thousands have been set up by partners who were not seeking to avoid IHT but simply making provision so the business need not be wound up in the event of the untimely death of one of the partners."

The Inland Revenue has confirmed, it is reported, that such policies will be caught by the pre-owned assets rules and each partner could therefore face an annual income tax charge on five per cent of the value of the policy for as long as they remain a beneficiary of the trust that they have established.

Ian Maston, director of estate planning at Chiltern said, "Although it may be possible in most cases for the partners to reorganise the arrangements to avoid the charge, that will still leave a large number of partnerships having to incur unnecessary professional costs to review and, if necessary, reorganise their arrangements. And, of course, they only have until 6 April to do this."